Can this fast-growing small cap soar 300% in five years?

Since listing in 1997, clothing retailer Ted Baker (LSE: TED) has been one of the LSE?s greatest success stories with the shares rising over 300% in value over the past five years alone. It has succeeded where many other retailers have failed by maintaining a coherent brand, rolling out new ranges over time and expanding into new markets in an equally steady way. The secret to this strategy has been the fact that founder Ray Kelvin is still CEO and holds some £450m worth of stock, so his interests are firmly aligned with those of ordinary shareholders.
Ted Baker?s incremental expansion…

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Since listing in 1997, clothing retailer Ted Baker (LSE: TED) has been one of the LSE’s greatest success stories with the shares rising over 300% in value over the past five years alone. It has succeeded where many other retailers have failed by maintaining a coherent brand, rolling out new ranges over time and expanding into new markets in an equally steady way. The secret to this strategy has been the fact that founder Ray Kelvin is still CEO and holds some £450m worth of stock, so his interests are firmly aligned with those of ordinary shareholders.

Ted Baker’s incremental expansion has worked well so far and a combination of new company-owned stores and international licensee agreements saw year-on-year constant currency sales increases of 23.6% in North America and 6% in Asia in the first half of 2016. Combined with a stellar 28% rise in global constant currency e-commerce sales over the same period, this was enough for total group sales to rise 14.4% to £259m.

While it has faced headwinds in some markets, the long-term potential of international expansion is eye-watering. In the first half, the UK and Europe still accounted for a full 68% of total group sales, showing that overseas markets have plenty of room to continue growing, particularly if the Ted Baker brand becomes as popular in the US as it has in the UK.

One to watch

While aimed at a different demographic, fast growing small cap Joules (LSE: JOUL) is attempting to replicate its larger rival’s success by following a strikingly similar strategy. Founder and Chief Brand Officer Tom Joule still owns a full 32% of the business and is also targeting a slow roll out of stores in the UK, careful expansion overseas through wholesale and online, and carefully expanding into collections for children and home good.

This has been working well so far and in the year to May revenue rose 12.8% and underlying pre-tax profits 41.5% year-on-year. This positive momentum has continued to build and over the Christmas period total retail sales were up 22.8% on the year due to new stores and organic growth.

Joules’ name recognition isn’t as strong as Ted Baker’s, but this is improving as the company’s products are now stocked by major retailers such as John Lewis and Next. Indeed, traffic to its website has been rising steadily and is paying off as the number of active customers in 2016 rose a stunning 33% to 824k. The even better news for Joules is that not only are new customer numbers growing, but so are the average spend per customer and frequency of customer visits.

This helped increase operating margins from 4.9% to 6.1% year-on-year in fiscal 2016. This is still well below Ted Baker’s 8.3% operating margins in the first half, but positive momentum is encouraging and shows there’s definitely potential for improvement. The clothing market is a tough one as brands constantly cycle in and out of favour, but Joules’ targeting an older, wealthier demographic as well as having a founder-led design team is encouraging.

Although its slower sales growth and a smaller target demographic means I find it hard to believe Joules will be able to match the level of success that Ted Baker has achieved, I’ll certainly be following the company closely all the same.

As investors who pounced on Ted Baker shares way back in 1997 will attest, investing in small caps can often be a fantastic way to build long-term wealth. That's why the Motley Fool's top analysts have recommended small-cap investing as one of their 10 Steps To Making A Million In The Market.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Ted Baker plc. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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